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Financial independence can be defined as having enough money to live a comfortable life without working. Financial independence can, in fact, mean different things to different people.

Financial independence secures your future and allows you to pursue your passion. It is the ability to make life decisions without being constrained by financial constraints. Financial independence removes dependency and shifts the focus on what I need and want in life. According to Aegon’s Retirement Readiness Index, 55% of working people are saving for retirement.

A Strategic Plan for Financial Independence

While we take on and repay our debts to be free of our previous financial worries, it becomes important to have a plan to achieve this freedom. Here are some of the features of this strategic plan:

• Financial Objectives: 

Your financial goals are unique to you. Consider your long-term objectives. Do you want complete financial independence—the freedom from having to work for a living and the ability to do whatever you want? Or are your goals more modest? 

Your age and financial situation will have an impact on your choice of objectives. If you are in your twenties or thirties, you have decades to accomplish your goals and the ability to take more risks. At this age, you might want to think about considering the FIRE (Financial Independence, Retire Early) strategy, which entails an extreme savings and investment strategy designed to allow you to retire much earlier than normal.

If you are older, say between the ages of 50 and 65, you almost certainly have retirement-savings goals, but if not, there is still time to plan for financial independence even if you do not. Depending on your goals and assets, this may entail a riskier investment strategy to compensate for lost time. Alternatively, you may need to rethink what constitutes retirement comfort.

• Assets:

Which tools (weapons) will you require to achieve your goals? These can include a variety of income-producing assets, such as a savings account or CDs, as well as a portfolio of dividend-paying stocks, bonds (or bond funds), and real estate. 

Many people’s largest asset is their home, which can be converted into equity or used in a reverse mortgage to help fund retirement. And that isn’t the only way to make a real estate investment. Rental properties can generate significant cash flow, but they can also require significant investment and risk. Another option is to invest in real estate investment trusts (REITs).

Starting and running a profitable business with the eventual goal of either not being directly involved in day-to-day management or selling the business for a big profit is another wealth-building asset.

• Tactics:

Begin by creating a budget that considers your income and other assets, allows you to pay your bills, and, if feasible, allows you to save and invest. Consider your budget as a road map to financial security. Pay attention to where your money is going and stay away from dead ends. Wherever possible, cut costs to free up funds for saving and investing.

If you have access to one, take full advantage of any retirement savings plans.

Similarly, establish an emergency fund to offer liquidity when you need it the most, such as for an unexpected (but required) expense. It’s critical to prepare for unforeseen circumstances that could ruin your efforts. It doesn’t have to be a pandemic; it could be a disease, a job loss, or a downturn in the economy, similar to the Great Recession of 2007–2009.

Finally, construct an investment strategy that takes advantage of compound interest’s power.

• Perseverance: 

The concept of “eternal vigilance” in the pursuit of liberty could also be applied to financial independence. The path to financial independence necessitates a lifelong commitment to budgeting and investing.

Continue to look for new opportunities and new ways to make the most of your hard-earned money.

Perseverance also necessitates learning the steps for constructing a profitable investment portfolio and ensuring that it is rebalanced regularly to keep it moving toward your financial goals. Then, as you get closer to retirement, make adjustments. 

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Freedom did not come easily to India. It took nearly a century of struggle to achieve independence from foreign rule. So many sacrifices were made over hundreds of years of struggle before we were able to celebrate what we now call our Independence Day.

Achieving financial independence may not be easy. It may be necessary to give up some of your luxuries today in order to live comfortably later. Your efforts to save and accumulate the necessary funds to be financially independent may take a long time. And your investments may experience highs and lows at times. It is critical to remain calm and immune to disruptions while working to achieve “Financial Freedom.”

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Financial literacy is a fundamental life skill that has a direct impact on your well-being. Knowing the importance of financial literacy and taking proactive steps towards it can be beneficial. This helps today’s youth take better control over their finances, enabling them to overcome financial challenges. 

When they’re financially literate, they understand how to allocate their money to several goals simultaneously. Taught early, fundamentals, such as money management, savings, investment, and debt management build a solid basis for good financial habits. 

Youth is a period when unique and creative thoughts and ideas emerge, shaping the society and nation we live in. But are they adequately prepared with the tools necessary to influence the future? Enhancing their financial literacy by encouraging them can help them significantly. 

What is the Significance of Financial Literacy?

A working population, with the majority being young people, can contribute to the economy and dictate the country’s growth points to a bright future. However, a quick survey on the floor will reveal that nearly every young person is concerned about money. 

It is well acknowledged that most young people are woefully unprepared to secure their current and future financial security. So, will they be able to prepare? 

This is only feasible if they start learning about saving, debt, taxation, and the foundations of banking, insurance, and debt management from a young age. They generally learn about money through informal socialising, such as seeing and listening to their caretakers, important adults, and classmates. 

They’re not routinely exposed to formal financial education. Our educational system lacks institutional frameworks, such as a classroom curriculum or other courses on:

• Saving
• Spending
• Allowances
• Focusing on short-term goals to achieve long-term goals

This makes it critical to take proactive steps towards financial literacy.

Importance of Financial Literacy

Here’s why being financially literate is beneficial:

• Empowers you to achieve your financial goals on time
• Safeguards you against making wrong errors that can lead to financial crisis
• Equips you to navigate financial emergencies effectively
• Instils confidence in financial decision-making
• Aids in identifying fake schemes and avoiding financial fraud
• Facilitates retirement planning
• Encourages you to make the right decisions and avoid herd mentality

How Can Financial Literacy Help Youth

Without financial literacy, the actions and decisions you make (or do not make) regarding savings and investments would be based on shaky ground. Financial literacy is a thorough understanding of the methods that are essential for financial growth and success.

• Investing

Rather than keeping money idle in a bank account, you can invest in financial products. Millennials must understand – investing is all about creating and developing wealth so that you can live a secure and happy life. It’s all about investing in a strategy that will help you earn substantial profits over time.

• Defending Against Debt and Bankruptcy

Creating an emergency savings account that can help in a disaster is critical to avoid debt accumulation. To prevent bankruptcy, a financially-savvy individual understands how much to save aside. 

Ideally, it should be three to six months’ worth of expenses and it should be preserved at that level at all times. Of course, they should also know about emergency loans.

• Savings 

Keeping money aside provides financial stability, a secure present, along with a financially solid future. With strong financial planning, you can easily build a corpus for future. It is possible to save money by assessing your spending habits.

• Saving for Retirement

Saving for retirement while achieving short-term objectives is a sign of financial literacy. It helps you figure out how much to save, what kind of retirement life you want, and how to get there.

• Paying Off All Debts  

Only those who are already in debt understand the agony of being trapped in debts. Financial literacy can assist young people in determining the most effective ways to get out of debt, whether on their own or with the assistance of a respected professional.

• Understanding the Cost of Living

Making a budget is a crucial part of developing financial literacy since it allows you to have a genuine knowledge of your income and spending. Once a budget is established, you can use it to manage your finances and minimise needless expenditures. 

By keeping these points in mind, young individuals can plan their finances better. In this manner, they can also enhance their savings and build a corpus for the future. When it comes to budgeting, the golden rule is that revenue must exceed spending.

Understanding the components of financial literacy can help one enhance their financial knowledge. They can then set and work toward financial objectives that complement their vision for a happy life. 

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FAQs on Why Financial Literacy is Important

How can I enhance my financial literacy?

You can boost your financial literacy through these ways:

• Reading about financial concepts
• Taking part in financial education camps
• Using financial management tools
• Assessing and managing your own finances
• Getting professional assistance

What are the 5 basic principles of financial literacy?

Here are the primary principles:

• Earn
• Save and invest
• Protect
• Spend
• Borrow

COVID19 may have put a strain on employees’ finances, but it has certainly helped in several other ways. Everyone has learnt a lot – from the importance of being present with family and supporting them in times of need to become more financially savvy. Professionals worldwide were tested by the COVID-19 pandemic, forcing them to reconsider their financial strategy. Every employee’s top priority was minimizing the pandemic’s impact on personal income. How did they fare? What was the experience like? Let’s find out.

The Great Covid-19 Impact 

The economic repercussions of the COVID-19 pandemic have not been distributed evenly. Many of those with fewer resources have been the least able to defend themselves. The unemployment rate has grown further as a result of the wave of job losses. The pandemic has touched not only those who are unemployed but also those who are working. The pandemic has altered every area of personal finance. And everyone is waking up to the fact. Many people were unable to meet their financial objectives as a result of the crisis. However, by correctly strategizing, the odds of rebounding from those defeats are high.

The catastrophe has also prompted firms to devise new methods of ensuring their employees’ well-being. In short, in 2020, employees’ jobs and relationships with their employers have changed dramatically. Employees’ wants and ambitions have shifted to accommodate the new normal of working from home. 

Family and work-life are intertwined, bringing with them personal and financial concerns. These include matched or unmatched retirement plans, student debt repayment aid, financial counselling access, and other perks. Employers may now use the impact of financial health benefit plans on employees as a valuable employee resource and a compelling retention and hiring tool.

The Acknowledgement

As the coronavirus spread throughout the world, millions of employees lost some or all of their earnings. According to Grant Thornton’s “Human Capital Survey,” around 40% of employees in India saw a compensation cut as a result of COVID-19. The findings also found that almost 45 per cent of respondents had seen no change in overall compensation in the previous year. While 40% of respondents reported a decline in overall compensation, just 16% reported a temporary decrease in fixed pay, according to the survey.

According to new research, as employees face increased financial stress due to the COVID19 outbreak, an increasing number of employers believe it is their job to improve their employees’ financial status. According to the survey, the area of issues covered by workplace financial health plans has also expanded since 2013. Employers are now more likely to handle general financial difficulties in their employees’ lives, typically by providing assistance, counsel, or training in the following areas:

•  Retirement savings (81% of employers in 2020 provide them, compared to 70% in 2013). 
•  Plan health care expenses, including medical savings accounts (71% of employers, vs 38%). Budget (63% of employers vs 14%). 
•  Save college fees (55% of employers, over 13%). 
•  Debt management. (54% of employers, more than 15%).

The solution

The pandemic emphasizes the need for benefits that can adapt to changing times and assist employees in better balancing work and life. Even before the pandemic, there was a strong desire for a financial health plan. Before the pandemic, a study of plan sponsors and participants revealed that the financial health plan was making progress.

When questioned about the impact of the financial health plan, 51% of employees indicated they were more interested in the company’s work, 40% said they were more efficient and focused, and 35% said they were under less pressure.

According to the employment report, paying for unexpected obstacles, saving for significant life milestones, and planning for retirement are just a few of the top sources of emotional stress for employees. Employees are increasingly demanding support from their employers and guidance on how to manage their finances and improve their overall financial situation. Employers can enhance their employees’ lives while also enhancing their financial literacy and bringing them closer to achieving their financial objectives by providing a comprehensive financial health benefits plan.

Several ways in which financial health benefits assisted today’s workforce in managing finances throughout the global pandemic are listed below:

• Remind employees to take advantage of their health insurance:

There is plenty of financial stress to go around—and it can have a severe impact on the health of your staff. Money-related stress has been linked to heart disease, diabetes, headaches, sleep issues, depression, and other health concerns. These diseases can lead to significant, high-cost medical problems, leading to even greater financial anxiety and instability. To get the most advantage, ensure that your employees understand how to keep track of their healthcare spending.

• Greater employee engagement

According to a recent survey, when asked what generated the most stress in their lives, more employees answered financial concerns than any other life stressor combined. 63 per cent of employees report their financial burden has worsened since the pandemic began. Employers who invest in their employees’ health will find that they are more willing to work with them for extended periods.

• Prepare employees for unforeseen financial challenges:

According to a 2019 report, 37% of adults could not pay with cash or financial equivalents, while another 13% could not pay in any form. Many employees have encountered financial insecurity and were unprepared for short-term monetary needs even before the COVID19 pandemic.

• Need to provide educational tools and resources: 

Employers should give their employees educational materials and resources to educate them on emergency funds and urge them to create one. This simple perk aided employees in building better saving habits and planning for unexpected financial difficulties. Employees value this benefit as well.

• Reduced employee debt pressure:

Many professionals are in debt, whether from school loans, credit cards, mortgages, or auto loans. For qualified companies, providing some assistance with employees’ school debt payments has a considerable impact on their overall financial situation.

One option for assisting workforces here is to provide substantial employee benefits to help them manage their financial lives. Work and money are two familiar sources of stress. A holistic welfare approach can help to improve employee health and make employees feel more valued by their employers.

• Individual efforts: While employers are responsible for their employees’ well-being, they also must become aware of their challenges and take appropriate. The pandemic has made many realize the true value of financial knowledge. Some things that can be done to live a more carefree life include:

• Investing
• Keeping more liquid assets
• Keeping debt control
• Enough savings for rainy days

To sum it up

No doubt, employees were confronted with a new challenge as a result of the COVID-19 outbreak. The consequences have been global, affecting every country and its people. Regardless of the dangers and stress, it is vital to remember that we’re nearing the end of this episode. This last leg requires a shift in priorities, with a focus on financial and risk management.

Not many are aware that there is a difference between a CIBIL score and a credit score. The former is a type of credit score, whereas a credit score is a measure of your creditworthiness. It is based on your past repayment behaviour and financial standing. 

While there are four main credit reporting agencies authorised by the RBI to generate your credit score, TransUnion CIBIL is the most popular one among them. The credit score generated by them is the CIBIL score, which is why the terms are used interchangeably.

Likewise, when comparing the FICO score vs credit score, know that a similar distinction exists. The former is simply a type of credit score. However, the parameters chosen to generate the score may differ slightly from the CIBIL score. Read on to learn more about the FICO credit scoring system and how the score is calculated.

What is a FICO score?

This is a credit score generated by the Fair Isaac Corporation and hence the name. This score considers the following factors when calculating a borrower’s credit standing:

• Payment history
• Outstanding balances
• Age of credit
• New credit
• Credit mix

While Indian lenders commonly rely on credit scores generated by four credit bureaus, the FICO score has forayed into the Indian lending arena. This score, like a CIBIL score, is a 3-digit numerical summary within the range of 300 – 850.

Using the FICO score, lenders analyse your repayment ability. FICO categorises the scoring criteria into five areas and assigns a percentage score based on the weightage of each category. 

While the payment history constitutes 35% of the score, 10% depends on the mix of credits you own. Here are the remaining factors affecting the FICO score.

• Your payment history: 35%
• New credit: 10%
• The length of your credit history: 15%
• The total amount you owe: 30%

Types of FICO scores

There are many versions of the FICO credit scoring system, depending on the types of credits and the credit bureaus. Below are the different types of common FICO credit scores.

Among all these versions, FICO® Score 8 is the most common version that applies to personal, educational and other types of credits.

Also Read: How to improve credit score

Is a FICO score the same as a Credit score?

Much like the difference between a CIBIL score and a credit score, a FICO score is simply another type of credit score. Various parameters used to calculate a particular score may differ based on the credit bureau. FICO offers different variations of the score, helping lenders get a reliable and trustworthy score. 

Here, the base score rating helps a lender evaluate your credit repayment ability. On the other hand, sector-specific scores are tailored according to certain credit products, such as credit cards or home loans.

However, each scoring model takes a unique approach that may result in a different score even if they use the same field and information from the same credit report. In part or entirely, FICO also creates other types of scores based on a credit report. 

FICO is more transparent than credit scores and, most times, comparatively cheaper for all the parties involved. However, reports produced by the three credit bureaus are important to monitor your progress because they help to attain that ideal credit score.

A good credit score is also crucial if you plan to get a loan. However, not all lenders rely on credit scores to approve loans. Fibe is one that uses an Alternate Credit Scoring Mechanism, which grants easier access to Instant Personal Loan. Download the Fibe Personal Loan App or visit our website and register to get started!

FAQs on FICO Score Vs. Credit Score

Which is better: A FICO score or a credit score generated by other credit bureaus?

Both scores have similar implications, even if the parameters used to calculate them may vary slightly. Credit scores generated by other agencies may not provide a comprehensive analysis to the lender and offer limited data. 

On the contrary, a FICO score periodically generates updated versions of the score built on the previous edition. This enables lenders to get an accurate and trustworthy picture of your credit management style. Hence, a FICO is considered a better alternative to other types of credit scores. 

Why is my FICO score different from my credit score?

The scoring model to calculate the FICO score is different from other credit scores. This is the reason there is a difference between FICO and other scoring systems.

Is FICO the highest score?

While the highest FICO score depends on the industry-specific version, FICO credit scoring ranges between 300 and 850. That said, a CIBIL score goes up to 900.